Regional Economic Prospects

in the EBRD Regions

November 2019

Stalling engines of growth

Growth to pick up in 2020 after a weaker 2019

Growth in the EBRD regions averaged 2.1 per cent year on year in the first half of 2019, down from 3.4 per
cent in 2018 and 3.8 per cent in 2017. This deceleration reflects continued weakness in Turkey, a slowdown in
Russia and slower growth in global trade and the world economy.

Global industrial production slowed, led by a contraction in the automotive sector. Given its deep integration
in ‘factory Europe’ and the importance of the automotive industry for the regions’ economies, emerging
Europe is highly vulnerable to weakness in the automotive sector and a further slowdown in Germany.
Growth in China also decelerated, affecting global demand for commodities and the outlook for commodity
exporters.

Technological change weighed on inflows of foreign direct investment (FDI) and the expansion of global value
chains, even before trade conflicts had escalated, as automation reduced the value of relocating production
to lower-wage economies. FDI inflows to the EBRD regions have continued to moderate in recent years.

On the upside, financing conditions faced by the EBRD regions’ economies and by emerging markets more
generally remain favourable relative to historical trends. As emerging markets have strengthened their
economic policy frameworks, including more widespread use of flexible exchange rates and inflation
targeting, episodes of acute financial tightening have become less common and less pronounced.

The deceleration in the first half of 2019 has been modest in the EBRD regions as a whole. Growth in central
Europe and the Baltic States was supported by high wage growth and strong absorption of the European
Union structural and cohesion funds. In contrast, growth has weakened in most of south-eastern Europe,
weighed down by slowing growth in the eurozone. Slower growth in Russia reflected a hike in value-added
tax, a lower average oil price in 2019 and weak investment. Growth remained broadly stable across Central
Asia and eastern Europe and the Caucasus. Turkey’s economy entered a recession in the second half of 2018
amid tighter monetary policy and private sector deleveraging. It contracted by almost 2 per cent year on year

1
 OVERVIEW

in the first half of 2019. In the southern and eastern Mediterranean region, robust growth in Egypt
contrasted with slow growth elsewhere, in particular when measured in per capita terms.

Average growth in the EBRD regions is expected to moderate from 3.4 per cent in 2018 to 2.4 per cent in
2019 before picking up to 2.9 per cent in 2020. This represents a downwards revision compared with the
previous forecast published in May 2019 (of 0.1 percentage point in 2020). Growth is expected to slow in
most of central Europe and the Baltic States and south-eastern Europe in line with weakening growth in the
euro area and a global contraction in car production. Growth is forecast to pick up in Russia in 2019 and
2020, boosted by higher levels of public investment. A pickup in growth in Russia is expected to support
growth momentum in eastern Europe and the Caucasus and Central Asia. Turkey is projected to return to
growth in the second half of 2019, although a mild contraction is expected for the year as a whole. In the
southern and eastern Mediterranean region, growth in 2019 and 2020 should remain broadly at 2018 levels,
supported by strong momentum in Egypt.

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 OVERVIEW

Table 1. Real GDP growth

Forecast
Actual 1 Change from
(Novem ber
May 2019 REP
2019)
2017 2018 H1 2019 2019 2020 2019 2020
2
Average for the EBRD regions 3.8 3.4 2.1 2.4 2.9 0.0 -0.1

Central Europe and the Baltic states 4.4 4.8 4.2 3.7 3.2 -0.1 -0.1
Croatia 3.1 2.6 3.1 3.0 2.5 0.5 0.0
Estonia 4.9 4.8 4.2 3.2 2.6 0.0 0.0
Hungary 4.1 5.1 5.2 4.6 3.1 0.9 0.2
Latvia 4.6 4.8 2.4 2.6 2.2 -0.7 -0.5
Lithuania 4.1 3.6 4.0 3.6 2.3 0.5 -0.2
Poland 4.8 5.1 4.4 3.9 3.5 -0.2 0.0
Slovak Republic 3.2 4.0 3.0 2.5 2.5 -1.1 -0.8
Slovenia 4.8 4.1 2.9 3.0 2.8 -0.3 0.0

South-eastern Europe 4.3 3.4 3.4 3.3 3.0 0.2 0.0

South-eastern EU 4.8 3.2 3.6 3.3 2.9 0.4 0.1
Bulgaria 3.5 3.1 4.2 3.7 3.0 0.3 0.0
Cyprus 4.5 3.9 3.2 3.2 2.8 -0.2 -0.2
Greece 1.5 1.9 1.5 2.0 2.4 -0.2 0.2
Romania 7.1 4.0 4.6 4.0 3.2 0.8 0.0
Western Balkans 2.5 4.0 2.9 3.2 3.4 -0.2 0.1
Albania 3.8 4.1 2.4 2.8 3.5 -1.1 -0.4
Bosnia and Herzegovina 3.2 3.6 2.7 3.0 3.0 0.0 0.0
Kosovo 3.7 3.8 4.2 4.0 4.0 0.0 0.0
Montenegro 4.7 5.1 3.1 2.8 2.6 0.0 0.0
North Macedonia 0.2 2.7 3.6 3.2 3.2 0.2 0.2
Serbia 2.0 4.4 2.8 3.2 3.5 -0.3 -0.3

Eastern Europe and the Caucasus 2.4 3.0 3.0 2.9 2.9 0.1 -0.1
Armenia 7.5 5.2 6.8 6.0 5.0 1.5 0.5
Azerbaijan 0.2 1.4 2.4 2.8 2.4 -0.7 -0.9
Belarus 2.5 3.0 0.9 1.3 1.2 -0.7 -0.6
Georgia 4.8 4.7 4.7 4.5 4.5 0.0 0.0
Moldova 4.7 4.0 5.2 3.8 4.0 0.3 0.2
Ukraine 2.5 3.3 3.6 3.3 3.5 0.8 0.5
Turkey 7.4 2.6 -1.9 -0.2 2.5 0.8 0.0

Russia 1.5 2.3 0.7 1.1 1.7 -0.4 -0.1

Central Asia 4.7 4.8 5.1 4.9 4.7 0.5 0.5

Kazakhstan 4.1 4.1 4.1 3.9 3.6 0.4 0.4
Kyrgyz Republic 4.7 3.5 6.4 4.3 3.7 0.7 0.1
Mongolia 5.3 6.9 7.3 6.8 5.4 0.6 0.4
Tajikistan 7.1 7.3 7.5 7.0 6.3 2.0 1.8
Turkmenistan 6.5 6.2 6.2 6.3 6.0 0.0 0.0
Uzbekistan 4.5 5.1 5.8 5.5 5.8 0.5 0.6
Southern and eastern Mediterranean 3 3.8 4.3 4.4 4.4 4.8 -0.2 -0.3
Egypt 4.2 5.3 5.6 5.6 5.9 0.1 0.0
Jordan 2.1 1.9 1.9 2.1 2.3 -0.1 -0.1
Lebanon 0.6 0.2 0.2 e 0.2 -0.2 -1.1 -2.2
Morocco 4.2 3.0 2.6 2.7 3.3 -0.5 -0.5
Tunisia 1.9 2.5 1.2 1.5 2.6 -1.2 -1.5

EBRD regions excluding Turkey 3.1 3.5 2.9 2.9 3.0 -0.1 -0.1
1
'e' indicates that figures for H1 2019 are unofficial estimates.
2
Weighted averages, based on countries' nominal GDP values in PPP US dollars. Weights for 2020 have been
updated since the May 2019 REP.
3
EBRD figures and forecasts for Egypt's real GDP reflects the country's fiscal year (July to June).

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Growth in the EBRD regions slowed to 2.1 Forecasts of global growth in 2019 have
per cent year on year in the first half of 2019 repeatedly been revised downwards
Chart 2. Real GDP growth forecasts for 2019
Growth in the EBRD regions averaged 2.1 per cent (per cent)
year on year in the first half of 2019, down from
3.4 per cent in 2018 and 3.8 per cent in 2017 (see
Table 1 and Chart 1).1

This deceleration reflects continued weakness in

Turkey (where output contracted by close to 2 per
cent year on year in the first half of 2019), a
slowdown in Russia (from 2.3 per cent in 2018 to
0.7 per cent in the first half of 2019) and weaker
export growth across the region, mirroring the
global trade slowdown.

Growth slowed in the first half of 2019

Chart 1. Average real GDP growth rates
(12-month rolling average, per cent)
Sources: IMF and authors’ calculations.
Note: Dates refer to the releases of IMF forecasts for 2019.

Global trade growth fell to 1 per cent year on year

Sources: CEIC Data, EBRD model forecasts and authors’
calculations.
in the first half of 2019, the slowest pace of
growth for any six-month period since 2012,
weighed down by trade tensions between the
United States of America and China and by lower
import demand from China.
Slowing industrial production

Global growth and global trade growth
slowed further
The global economy has been experiencing a
synchronised slowdown. Global growth in 2019 is
forecast to be the slowest since the global
financial crisis of 2008-09, according to the World
Economic Outlook of the International Monetary
Fund (see IMF (2019)). Forecasts for the eurozone
economies have also been repeatedly revised
downwards, to their lowest levels since 2013 (see
Chart 2).
Underlying the slowdown in global growth of GDP
and trade is a sharp and geographically broad-
based slowdown of industrial production (Chart
3). Weaker industrial production in the EU, and
Germany in particular, is weighing on central and
south-eastern Europe, where declines in industrial
production have also been observed in the past
six months. Industrial production is slowing in
China, too, albeit more moderately, translating
into lower global demand for commodities.

1
Averages are weighted using the values of countries’
gross domestic product (GDP) at purchasing power
parity (PPP).

4

Industrial production slowed
Chart 3. Industrial production growth
(year-on-year change, per cent)
Sources: CEIC and authors’ calculations.
Note: Three-month moving average.
Contraction in the automotive sector
This slowdown in industrial production has been
led by a reduction in the global output of
passenger vehicles (so far, sales of commercial
vehicles have held up). Global car production fell
in 2018 – a drop previously seen only in the run-
up to the dot-com crisis and during the global
financial crisis. The contraction in the automotive
industry continued into 2019 (see Chart 4). Job
growth in Germany’s automotive industry stalled
in 2018 for the first time since 2013. Prior to that,
direct employment in the automotive sector in
Germany (excluding those employed by suppliers
of goods and services to car producers) increased
from 2.4 per cent of total employment in 2000 to
2.9 per cent in 2017.
The car industry slump reflects a number of one-
off factors, including the rollout of new euro-wide
emission tests in the third quarter of 20182, a
drop in demand after the expiration of tax
2
The large number of models requiring certification led
to bottlenecks at testing agencies and car producers
had to adjust production schedules to avoid unwanted
inventory accumulation. German car production was
down by 8 per cent quarter-on-quarter in the third
quarter of 2018.
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OVERVIEW
incentives in China3 (Chart 5) and falling demand
for diesel-powered vehicles (in the EU, the market
share of diesel passenger cars fell by 16 per cent
between 2015 and 2018 as consumers switched
to petrol, electric and hybrid vehicles).
Global car production contracted
Chart 4. Motor vehicle production (1997=100)
Sources: CEIC Data, Eurostat, International Organization of
Motor Vehicle Manufacturers and authors’ calculations.
Note: Projections for 2019 are based on partial data for the
period January to September. ‘Selected economies in the
EBRD regions’ includes Hungary, Morocco, Poland, Romania,
Serbia, Slovak Republic, Slovenia and Turkey.
Weak demand for cars is likely also to be a
reflection of longer-term trends as consumers
need to replace higher-quality cars less
frequently, while younger consumers also shift
away from ownership of manufactured goods and
of cars in particular. In Europe, new restrictions on
emissions, such as the introduction of an ultra-
low-emission zone in London, may also have
contributed to weaker demand for cars.
In the first nine months of the year, car
production in China, Germany, Japan and the
United States of America declined by almost 8 per
cent. Car production in emerging Europe
3
Tax breaks have been used in China to encourage
vehicle ownership. The purchase tax was lowered to 5
per cent in 2016 before increasing to 7.5 per cent in
2017 and 10 per cent in 2018. The lower tax rate in
2016 is estimated to have brought sales forward by 20
per cent of production, with a subsequent decline in
sales in 2018-2019.
 OVERVIEW

increased in year-on-year terms in the first half of The Slovak Republic is the top producer of cars
2019, but early data indicate that production per capita
growth has turned negative in recent months. Chart 6. Motor vehicle production, 2018
(units per 1,000 population)
Falling production in China weighed on global car
production
Chart 5. Motor vehicle production
(contributions to percentage changes)

Sources: CEIC Data, Eurostat, International Organization of

Sources: IMF and authors’ calculations.
Note: EBRD economies included in ‘Rest of the world’ account
for 5 per cent of global car production, with a growth
contribution of around 0.1 percentage point in 2018.
Emerging Europe highly vulnerable to
weakness in the automotive sector and a
further slowdown in Germany
Motor Vehicle Manufacturers and authors’ calculations.
Central and south-eastern Europe are also highly
dependent on the automotive sector
Chart 7. Importance of automotive industry, 2015
(percentages of country’s total exports and gross
output)

Relative to its population, the Slovak Republic is

the world’s largest car producer (Chart 6). The
sector accounts for over a quarter of the
economy’s exports and almost 15 per cent of
gross output (Chart 7).

Other economies in central and south-eastern

Europe, such as Hungary, Poland, Romania and
Slovenia, are also highly dependent on the
automotive industry. A single Audi plant in Győr, in
Sources: CEIC Data, Eurostat, International Organization of
the north-west of Hungary, accounts for 9 per cent Motor Vehicle Manufacturers, OECD-WTO Trade in Value
of Hungarian exports. Added (TiVA) and authors’ calculations.

Direct employment in car production (excluding

those employed by suppliers of goods and
services to the automotive sector) accounts for 3
to 5 per cent of employment in the Slovak
Republic, Hungary, Slovenia and Romania –

6

exceeding the share observed in Germany (see
Chart 8).
The automotive industry accounts for a higher
share of employment than in Germany
Chart 8. Direct employment in the automotive
industry, 2018
(percentage of total employment)
Sources: Eurostat and authors’ calculations.
Furthermore, while overall manufacturing
employment in the region has declined since 2010
or remained broadly flat (see Box 1), employment
in the automotive sector has been growing rapidly
(Chart 9), often at double-digit rates.
Employment in the automotive sector far
outpaced employment growth in manufacturing
Chart 9. Employment growth by sector, 2010-18
(per cent)
Sources: Eurostat and authors’ calculations.
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OVERVIEW
Given that the region’s economies are deeply
integrated within ‘factory Europe’ and depend on
the car industry, the exports of central European
countries tend to follow strongly the export
trends of Germany (Chart 10), with correlations
reaching 70-80 per cent in Hungary, the Slovak
Republic and Slovenia (see also Leal et al. (2019)
for estimates of the impact on central Europe of
the contraction in Germany’s automotive sector).
High dependence on Germany
Chart 10. Global value chain (GVC) integration and
export correlation with Germany, 2009-19
Sources: International Trade Centre (ITC), OECD-WTO Trade
in Value Added (TiVA) and authors’ calculations.
In 2018, employment growth in the automotive
sector in central Europe fell to its lowest level
since 2010. Daimler has recently postponed the
expansion of its compact-car plant in Kecskemét,
central Hungary. Data on new orders and business
confidence indices point to a further slowdown in
the second half of 2019, with an adverse impact
on demand for metal products.
A further slowdown in the German car industry
and potential near-term disruptions from the
imposition of tariffs on importing EU cars into the
USA are thus key risks to the outlook for central
European economies. Tariffs on EU car imports
under consideration in the USA could affect US$
19 billion worth of German exports and US$ 3
billion worth of passenger car exports from the
Slovak Republic.
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Slowdown in China weighs on outlook for Slowing growth in China weighs on the outlook
commodity exporters for commodity exporters
Chart 12. Exports of goods to China
Growth in China slowed from an average of 10.6 (percentage of total goods exports)
per cent in 2001-10 to 6.6 per cent in 2018 and is
expected to slow further (Chart 11). The outlook is
weaker in a scenario of sustained trade tensions
with the USA, in which case the IMF estimates
that China’s growth would be 2 percentage points
weaker in the near term compared with the
scenario of no trade tensions (the estimates
assume slower productivity growth due to a
slower diffusion of technology and a lower rate of
innovation). Forecasts incorporating the latest
global data in a principal-component-based
framework also point to a weaker outlook in a
trade-conflict scenario (Chart 11). Sources: ITC and authors’ calculations.

Growth has been slowing in China
Chart 11. China’s real GDP growth and forecasts
(per cent)
For Kazakhstan, Russia and a number of other
commodity exporters, export correlations with
China are as high as those between countries in
central Europe and Germany (Chart 13). These
correlations are driven primarily by exports of
coal, copper, gas, minerals and oil. On the other
hand, linkages in the manufacturing value chain
account for high export correlations between
China and other Asian economies such as South
Korea.

Central Asia and Russia are vulnerable to a

slowdown in China
Sources: EBRD, IMF and authors’ calculations. Chart 13. Export share and export correlation with
Notes: IMF forecasts from the October 2019 WEO, EBRD
China, 2009-19
model-based forecasts.

Slower growth in China is expected to weigh on

growth in Central Asian countries. China is the
main export destination for Mongolia and
Turkmenistan, accounting for over three-quarters
of goods exports from these countries. It is also an
important trade partner for Uzbekistan,
Kazakhstan, Armenia and Russia, primarily due to
commodity purchases (Chart 12).

Sources: ITC and authors’ calculations.

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 OVERVIEW

Technological change has been weighing on benefit from its proximity to advanced European
FDI inflows and global value chain linkages economies, skilled labour forces and lower wages
— even before trade conflicts began compared with those in central Europe.

The gradual decline in foreign direct investment FDI inflows have been falling as a share of GDP
flows and trade in intermediate goods relative to Chart 14. Foreign direct investment
(inflows, percentage of GDP)
global output predates recent trade tensions.
While the tensions have exacerbated these trends
and brought them into the spotlight, longer-term
structural forces have been at play.

Automation reduced the importance of labour

costs in manufacturing and hence the value of
moving production from higher-wage to lower-
wage economies. In addition, wage differentials
between emerging markets and advanced
economies have narrowed. Rising geopolitical
tensions and policy uncertainty with respect to Sources: IMF, OECD, UNCTAD and authors’ calculations.
Notes: Figures for 2019 predicted using quarterly data
cross-border trade have made offshoring even
available for a subset of countries.
less attractive.
Trade in intermediate goods has been declining
The EBRD regions have benefited more from
globally
integration into global value chains than most
Chart 15. Trade in intermediate goods
other emerging markets have. FDI inflows, in
(exports + imports, percentage of GDP)
particular to the new EU member states, rose
sharply in the boom years before the global
financial crisis (see Chart 14).

Trade in intermediate goods as a share of GDP

also increased rapidly in the early 2000s and is
higher in the EBRD regions – in particular, in
emerging Europe – than in many other emerging
market economies, such as Malaysia or South
Africa (see Chart 15).

In line with trends seen in other emerging
markets, FDI inflows to the EBRD regions as a
share of GDP have been modest in recent years
(see Chart 14)4, with the notable exception of the
Western Balkans, a region that has continued to
4
FDI inflows to the EBRD regions have declined in
nominal US dollar terms since 2008. In other emerging
markets, including China, they have increased in
nominal terms but have been growing more slowly
than GDP.
Sources: IMF, World Integrated Trade Solutions (WITS) and
authors’ calculations.
Note: In Chart 15 the EBRD regions exclude Bulgaria due to
data limitations.
Trade in intermediate goods has also started to
decline as a share of GDP in emerging markets. In
the EBRD regions it has plateaued. While a slight
pickup has been observed recently, due to large
exchange-rate depreciations in Egypt and Turkey
(see Chart 15), in two-thirds of these economies

9

trade in intermediate goods is now below the
2011 levels (measured as percentages of GDP).
Financing conditions remain favourable
Having tightened throughout 2018, the financing
conditions faced by the EBRD regions’ economies
started to ease from January 2019, with interest
rates remaining low in historical terms (see Chart
16).
Financing conditions remain favourable
Chart 16. Yields (per cent)
Sources: Bloomberg.
Episodes of financial tightening less frequent
More generally, episodes of acute financial
tightening have become less common and less
pronounced. Previously, such episodes often
accompanied external, fiscal or banking crises in
emerging markets (see Box 2). As macroeconomic
frameworks in emerging markets have improved
(see also the discussion in the May 2019 Regional
Economic Prospects), business cycles have also
become more akin to those in advanced
economies, characterised by longer spells of more
moderate growth.
Central Europe has been outperforming
similar emerging markets by 1.6 percentage
points a year
Growth in the EBRD regions decelerated from 3.4
per cent in 2018 to 2.1 per cent in the first half of
2019.
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OVERVIEW
Growth in central Europe and the Baltic states
continued to surpass that observed in other
emerging markets at similar levels of
development (Chart 17)5. Over the period 2014-
19, GDP growth per capita in central Europe and
the Baltic states was about 1.6 percentage points
higher than in emerging markets with comparable
levels of income. This outperformance is larger
than the level seen during the pre-crisis boom of
the 2000s, when the region’s per capita incomes
were lower and the growth rates of comparator
economies, notably in Asia, were higher (at the
time, the region’s outperformance averaged
around 1 percentage point).
Central Europe and the Baltic states continued to
outperform similar emerging markets
Chart 17. GDP per capita growth in central Europe
and the Baltic states (per cent)
Sources: IMF World Economic Outlook and authors’
calculations.
Relative to the boom years of the 2000s, the
composition of growth shifted from investment
(including FDI) towards consumption. While in the
2000s the difference between high levels of
investment and moderate savings drove large
current-account deficits, external imbalances have
recently been smaller as savings have been rising
5
For a discussion of the methodology underlying such
estimates see EBRD (2017), Plekhanov and Stostad
(2018) and Box 3.

slightly as populations in these economies age
(Chart 18).
Recent outperformance in new EU member
states has been underpinned by consumption
rather than investment
Chart 18. Savings, investment and FDI flows
(percentage of GDP)
Sources: IMF World Economic Outlook and authors’
calculations.
Notes: New EU member states comprise Bulgaria, Croatia,
Cyprus, Estonia, Hungary, Latvia, Lithuania, Poland, Romania,
the Slovak Republic and Slovenia. Emerging Asia comprises
China, India, Indonesia, Malaysia, the Philippines, South
Korea, Thailand and Vietnam.
Consumption has been boosted by high wage
growth in tight labour markets. Wage growth that
far exceeds labour productivity growth has not yet
translated into significant inflationary pressures
(see Chart 19) – possibly explained by a
combination of well-anchored inflation
expectations and high demand for real estate
assets (house prices in the capital cities of central
Europe have been rising particularly fast).
11
OVERVIEW
Rapid wage growth in central Europe
Chart 19. Nominal wages, labour productivity,
consumer prices and house prices in central Europe
(2014=100)
Sources: Eurostat, OECD and authors’ calculations.
Note: Central Europe comprises Hungary, Poland, the Slovak
Republic and Slovenia.
GDP growth in central Europe and the Baltic
states in the first half of 2019 averaged 4.2 per
cent, representing a deceleration of 0.6
percentage point compared with the outcome of
2018. Growth was supported by strong wage
growth and high absorption of the EU structural
and cohesion funds in late 2018 and early 2019.
Growth decelerating in 2019
High-frequency indicators, however, point to a
slowdown in the second half of the year. Car
exports have begun to fall in Hungary and the
Slovak Republic (despite an offsetting contribution
from the new Jaguar Land Rover plant in the
Slovak Republic). Monthly indicators of new car
orders have been falling in most countries since
mid-2019.
In contrast, growth was already weak in the first
half of 2019 in the Western Balkans, weighed
down by slowing eurozone growth. Growth
disappointed in Serbia, with weak industrial
production; exports from Fiat’s Serbian car plant
have been falling. While the region has benefited
from FDI, the local supplier base remains small,
limiting the positive spillovers from FDI to the
local economy.

Slower growth in Russia in the first half of 2019
reflected a hike in the rate of the value added tax,
weak investment, including slower-than-expected
implementation of government projects, and a
lower average oil price in 2019.
The oil price spiked only briefly following attacks
on Saudi Arabia’s energy infrastructure in mid-
September. In January-October 2019, the Brent oil
price averaged US$ 65 per barrel, 10 per cent less
than in the same period of 2018 (see Chart 20).
Average oil price in 2019 is down compared with
the 2018 average
Chart 20. Oil price and change in oil price
Source: Thomson Reuters.
Growth in the first half of 2019 exceeded
expectations in most of Central Asia as well as
eastern Europe and the Caucasus. Remittances
remained stable in US dollar terms and continued
to increase in local currency terms (see Chart 21).
In Kazakhstan, growth in early 2019 was
supported by public spending on social
programmes. Meanwhile, growth exceeded
expectations in Ukraine, driven by booming
construction. In Azerbaijan, growth was
disappointing, reflecting delays in the
implementation of oil and gas projects.
12
OVERVIEW
Remittances continue to increase in local
currency terms
Chart 21. Remittances from Russia (2013 Q4 = 100)
Sources: Central Bank of Russia and authors’ calculations.
Turkey entered a recession in the second half of
2018, amid tighter monetary policy and private
sector deleveraging following earlier overheating,
with strong credit growth, high inflation and
growth peaking in double digits in mid-2017.
Growth in Turkey turned positive in quarter-on-
quarter terms in early 2019 owing to
expansionary fiscal policy and an increase in credit
driven by state banks. In year-on-year terms,
however, the economy contracted by 1.9 per cent
in the first half of 2019.
While growth momentum in Egypt has remained
strong on the back of high tourism receipts and
the implementation of the Tourism Reform
Programme, elsewhere in the southern and
eastern Mediterranean growth has remained low,
in particular when measured in per capita terms.
Growth in 2019 as a whole is projected to
moderate, in line with global trends
The latest economic indicators such as retail sales,
exports and imports point towards further
moderation, based on estimates derived using a
principal-component-based model that takes into
account more than 150 global indicators as well as

estimates of the medium-term potential growth
of economies (see Chart 1).6
Average growth in the EBRD regions is expected
to moderate in 2019 as a whole relative to 2018
(see Charts 22 and 23), in line with weakening
eurozone growth and global trade headwinds. For
the region as a whole, growth is then expected to
recover somewhat in 2020 as the economy gains
momentum in Turkey and Russia.
Growth is expected to moderate in 2019 before
picking up somewhat in 2020
Chart 22. Average real GDP growth (per cent)
Sources: IMF World Economic Outlook, EBRD forecasts and
authors’ calculations.
Growth is expected to moderate in 2019 in most
of the EBRD regions
Chart 23. Average real GDP growth rates
(per cent)
Sources: IMF World Economic Outlook, EBRD forecasts and
authors’ calculations.
6
See the November 2017 edition of the Regional
Economic Prospects for a discussion of this model.
13
OVERVIEW
Forecasts have repeatedly been revised
downwards in most of the EBRD regions, with the
notable exception of Central Europe where
domestic demand held up better than expected
(see Chart 24).
Forecasts have repeatedly been revised
downwards
Chart 24. Real GDP growth forecasts for 2019
Sources: EBRD and authors’ calculations.
Note: Dates refer to issues of the Regional Economic
Prospects.
Growth is expected to moderate in most of
central Europe and the Baltic states and south-
eastern Europe, in line with weakening eurozone
growth and headwinds to global trade.
Growth is expected to pick up in Russia in 2019
and 2020 on account of increased public-
investment spending and a more accommodative
monetary policy. Stronger growth momentum in
Russia will support growth in eastern Europe and
the Caucasus and in Central Asia.
Output is still expected to contract in Turkey in
2019 as a whole, although the contraction is likely
to be smaller than previously expected, due to
credit growth, a fiscal stimulus and rising
consumer confidence. The economy is expected
to return to growth in 2020.
 OVERVIEW

In the southern and eastern Mediterranean

region, growth is expected to remain broadly
unchanged compared with 2018 levels. Continued
high growth in Egypt is likely to be driven by high
levels of investment and a strong tourist season
on the back of reforms in that sector. Lebanon’s
already bleak outlook is subject to significant
downside risks given the rising political tension
and the economy’s significant need for external
financing.

Risks

Given the EBRD regions’ deep integration into

global supply chains, a further escalation of trade
tensions and rising global uncertainty about policy
(including with regard to Brexit – see Box 3) are
major risks to the outlook. The World Trade
Organization is expected to rule in the first
quarter of 2020 in a dispute relating to subsidies
to Boeing, a US aircraft manufacturer, following
an earlier ruling in a case involving Airbus, an EU-
based aircraft manufacturer. Meanwhile, levies on
imports of cars from the EU remain under
consideration in the USA.

Economies in the EBRD regions are particularly

vulnerable to a further slowdown in the eurozone,
a deeper-than-anticipated slowdown in China and
protracted weakness in the automotive sector
globally.

14

Box 1: Vulnerabilities in emerging Europe
Emerging Europe has experienced rapid growth
over the past two decades, outperforming other
emerging markets at similar levels of
development. Much of this growth was, however,
driven by high inflows of FDI and by heavy reliance
on foreign-owned, capital-intensive
manufacturing, in particular in the automotive
sector, making the region vulnerable to changing
external conditions.
Manufacturing employment as a share of total
employment in the EBRD regions, and particularly
in emerging Europe, tends to be higher than in
other countries at similar levels of development
(see Chart 1.1).
Employment in industry is high in the EBRD
regions relative to other emerging markets
Chart 1.1. Employment in industry as a share of
total employment, by level of development, 2018
(per cent)
Sources: World Bank and authors’ calculations.
The share of manufacturing employment has been
falling on average in EBRD regions. While the
trend has not been as stark as in advanced
economies, it contrasts strongly with the still-
increasing manufacturing employment in many
other emerging markets (Chart 1.2).
Most of the decline occurred in the 1990s and
2000s. More recently, employment by foreign-
owned enterprises, and rapid employment growth
15
OVERVIEW
in the automotive sector in particular, have
leaned against the secular decline in
manufacturing employment as a share of total
employment.
Employment in industry has been declining
Chart 1.2. Employment in industry as a share of
total employment, by level of economic
development
(1997 and 2018, per cent)
Sources: World Bank and authors’ calculations.
Large FDI by leading multinationals, especially to
the new EU member states, has placed a number
of EBRD countries among the leading car
producers in the world when measured in per
capita terms.
This integration has, however, been accompanied
by only limited ‘learning’ so far. As economies
participate in global value chains and companies
learn from their suppliers, customers and
competitors, economies tend to develop
capabilities to produce higher value-added
components domestically.
In the EBRD regions, however, reliance on
imported inputs has remained broadly constant.
Despite strong export growth in the automotive
sector, foreign value-added has accounted for a
broadly constant share of the value of exports (an
average of 40 per cent in the EBRD regions – see
Chart 1.3 – and up to 60 per cent in Hungary and
the Slovak Republic).

Limited ‘learning’ from GVC integration
Chart 1.3. Foreign value-added as a share of total
exports (per cent)
Sources: OECD and authors’ calculations.
Note: Based on data for 17 economies in the EBRD regions
(the twelve members of the EU, as well as Kazakhstan,
Morocco, Russia, Tunisia and Turkey).
Foreign affiliates account for almost a quarter of
manufacturing output in the EBRD regions.
Foreign-owned multinationals from the EU
dominate car manufacturing and, to a lesser
extent, electronics (see Chart 1.4).
16
OVERVIEW
Foreign affiliates dominate the automotive
sector
Chart 1.4. Gross output share of foreign-owned
multinational enterprises, 2016
(percentage of industry output)
Sources: OECD and authors’ calculations.
Note: Based on data for 15 economies in the EBRD regions
(EU-12, as well as Morocco, Russia and Turkey).
In the short term, higher reliance on imports may
cushion the blow from the contraction in the
global automotive industry as lower exports will
be, to a larger extent, offset by lower imports. In
the long term, however, the relatively low
domestic content of exports is a reflection of the
difficulties that economies face in moving up the
value-added chain.
 OVERVIEW

Box 2: Financial and real cycles in emerging
markets
This box examines the frequency and severity of
episodes of financial tightening and recessions in
emerging markets and advanced economies.
Episodes of acute financial tightening have
become less common and less pronounced in
emerging markets. Business cycles have also
become more similar to those in advanced
economies, characterised by longer spells of more
moderate growth.
moderate growth. Upswings are identified using a
Bry-Boschan-Pagan algorithm on quarterly data –
an algorithm that dates cycles by searching for
local peaks and troughs in the time series of
output. The results indicate that the length of
upswings has increased in emerging markets
(including in the EBRD regions) to the levels
observed in advanced economies (see Chart 2.2).
Upswings have lengthened
Chart 2.2. Average length of upswings (quarterly)

Financial cycles have become less pronounced in

emerging markets. Chart 2.1 examines the
average increase in interest rates during financial
tightening episodes, defined as episodes where
interest rates increase by at least 1.5 percentage
points relative to the previous year. On this
measure, episodes of acute financial tightening,
historically associated with external, fiscal or
banking crises in emerging markets, have become
less common and less pronounced. Sources: CEIC Data and authors’ calculations.

Financial cycles have become less pronounced However, as economic cycles in emerging markets
Chart 2.1. Average increase in interest rates have lengthened, the average annual growth
during episodes of financial tightening during upswings has declined to the levels seen in
advanced economies (see Chart 2.3).

Average growth during upswings has declined

Chart 2.3. Average annual growth during
upswings (per cent)

Sources: International Financial Statistics (IFS) and authors’

calculations.
Notes: Five-quarter moving average, averaged across
economies.

Business cycles in emerging markets have also

Sources: CEIC Data and authors’ calculations.
become more akin to those in advanced
economies, characterised by longer spells of more

17
 OVERVIEW

In other words, as macroeconomic frameworks in Real and financial cycles are less likely to
emerging markets have improved (see also the coincide
discussion in the May 2019 Regional Economic Chart 2.4. Share of countries facing a recession
Prospects), business cycles have become more and/or financial tightening
akin to those seen in advanced economies, (per cent)
characterised by longer spells of more moderate
growth. The performance of advanced economies
and emerging markets has also become more
synchronised over time.

Reflecting stronger macroeconomic frameworks,

episodes of tightening in financial conditions are
now less likely to coincide with declines in output.
Indeed, emerging markets have been
experiencing fewer instances of real and financial
crises (see Chart 2.4). It should be noted that the
tendency for economic cycles in emerging
markets to becoming more akin to those in Sources: CEIC Data, IFS and authors’ calculations.
advanced economies does not imply anything Notes: Unbalanced sample of 49 countries. Recessions are
about the severity of any particular crisis that may defined as negative growth over two consecutive quarters (or
annual average). Financial tightening is defined as an
occur in the future.
increase in interest rates of 1.5 percentage points or more
relative to the previous year.

18

Box 3. The economic impact of Brexit-related
uncertainty
This box estimates the effects of Brexit-related
uncertainty since the 2016 referendum. In the
United Kingdom, this uncertainty appears to have
cost the economy about 1 percentage point in
terms of annual per capita GDP growth. The direct
impact of a ‘soft’ Brexit on most economies in the
EBRD regions is expected to be limited. The
indirect effects of a ‘hard’ Brexit are estimated to
be largest for economies in south-eastern Europe.
The recent performance of the UK economy in
terms of per capita GDP growth can be evaluated
against a ‘synthetic comparator’, a weighted
average of GDP per capita growth rates observed
in the same year in other countries at a similar
level of development.7 Countries with larger
populations and countries that are most similar to
the UK in terms of GDP per capita receive larger
weights when the synthetic comparator is
constructed.
The United Kingdom underperformed relative to
comparable economies in the period preceding its
accession to the European Communities in 1973
(see Chart 3.1). In contrast, its performance
improved by more than 2 percentage points over
the period 1975-2016. Since 2016, the economy
has underperformed relative to its comparators
by an average of 0.6 percentage point a year, a
difference of around 1 percentage point relative
to the 1975-2015 average.
7
For a detailed discussion of the methodology see
EBRD (2017) and Plekhanov and Stostad (2018).
19
OVERVIEW
The United Kingdom has underperformed
relative to comparators since the 2016
referendum
Chart 3.1. Growth in GDP per capita in the United
Kingdom and comparator economies (per cent)
Sources: IMF World Economic Outlook and authors’
calculations.
As of late October 2019, the modalities of Brexit
remain unclear. The direct impact of a ‘soft’ Brexit
(which assumes a relatively smooth exit for the
UK, with trade relationships being kept close to
their present levels) on most of economies in the
EBRD regions is expected to be limited, as
discussed in the November 2016 and November
2018 issues of the Regional Economic Prospects.
Exports of final or intermediate goods to the
United Kingdom are largest for the Slovak
Republic and Hungary (mostly in the automotive
and machinery sectors), and for Poland, Latvia
and Lithuania (wood and food products), but are
relatively modest. Direct imports of intermediate
goods from the UK are only sizeable for North
Macedonia.
A closer look at the automotive sector shows that
a tariff regime between the UK and the rest of the
EU would weigh on the profitability of automotive
plants in the UK. Given the current outlook for the
automotive industry, however, it is far from
certain that the Japanese car-makers operating in
the UK (Honda, Nissan, and Toyota) or other
manufacturers would consider moving production
to economies in central or south-eastern Europe.

Indirect effects – through weaker growth in the
eurozone – are estimated to be much larger, in
particular in the event of a ‘hard’ Brexit, where
the existing value chains encompassing the UK
and the rest of the EU are significantly disrupted,
while progress on new trade agreements between
the UK and its trading partners is slow (see Chart
3.2).
Cumulatively, the economic impact of a ’hard’
Brexit of this kind is projected to be largest in
south-eastern Europe, mainly through disruption
to trade linkages encompassing the UK and other
advanced economies in Europe and through lower
reform momentum on account of more uncertain
prospects for EU membership, which could have a
negative effect on investor sentiment and growth.
The slowing momentum in the approximation
with the European Union – highlighted as a risk in
the 2016 November Regional Economic Prospects
– has been observed to some extent, though it is a
matter of judgement whether a reduced appetite
for EU expansion in certain EU member countries
is related to Brexit.
EU structural and cohesion funds available to
economies in south-eastern and central Europe
20
OVERVIEW
may also be reduced in the period 2021-27, to the
extent that the EU does not introduce
compensatory revenues to make up for the UK’s
budget contributions. These funds averaged 3.3
per cent of GDP of EBRD-EU economies over the
period 2014-19, implying a potential one-off
impact on growth of around 0.4 percentage
points.
Indirect effects of Brexit are estimated to be
largest for economies in south-eastern Europe
Chart 3.2. Difference in levels of GDP relative to a no-
Brexit baseline over a five-year period (per cent)
Sources: EBRD calculations, based on a GVAR model (see
Transition Report 2016-2017 and November 2016 Regional
Economic Prospects). A ‘hard’ Brexit scenario assumes that
EU transfers are cut by 10 per cent as the withdrawal of the
UK contribution is not compensated by other countries.

Regional updates
Central Europe and the Baltic States
Central Europe and the Baltic states (CEB) has
mostly managed to maintain its very strong
growth momentum longer than Western Europe
has done. EU-financed investments, wage growth
driven by tight labour markets, and government-
supported initiatives have all helped.
Unfortunately, the slowdown in western Europe
has already started to weigh on exports from CEB,
thus weakening business sentiment and industrial
production. An employment slowdown could
follow, especially in the areas affected by
substantial minimum wage increases. But public
investment will play a stabilising role, given the EU
funds cycle.
Croatia
The economic recovery has continued in 2019,
following four consecutive years of solid growth
averaging 3.1 per cent, after a six-year recession
from 2009-14. The economy expanded by 3.1 per
cent year on year in the first half of 2019, on the
back of broad-based domestic demand. Growth
was equally supported by private consumption
and investments. Private consumption was fuelled
by increased earnings and higher employment,
with the unemployment rate as of June 2019 at
just 7 per cent (compared with 18 per cent in
2014), and an increased pace of household
lending (which grew by 6 per cent in the first half
of 2019). Investment continued along its recovery
path from 2015, helped by the growing
disbursement of funds from the EU, rising
economic sentiment and low interest rates. In line
with previous years, net exports contributed
negatively to growth, although to a somewhat
larger extent in the first half of 2019. Fiscal
adjustment has continued, although at a slower
pace, as government spending contributed
positively to growth. A balanced budget is
expected in 2019, following a small budget surplus
21
REGIONAL UPDATES
of 0.3 per cent of GDP in 2018. The government’s
commitment to joining the European Exchange
Rate Mechanism II, as part of the euro adoption
strategy, should serve as an anchor for prudent
fiscal policy in the coming years. Standard &
Poor’s and Fitch raised Croatia’s credit rating to
investment grade (BBB-) in March and June 2019
respectively. GDP growth of 3.0 per cent is
expected in 2019, followed by a light moderation
to 2.5 per cent in 2020, broadly in line with the
country’s current growth potential, as supply-side
constraints for the tourism sector become more
apparent. Growth is likely to be mainly driven by
private consumption, which is supported by
positive labour market developments and low
inflation. Risks to the projection come from
possibly weaker demand from Croatia’s main
economic partners, such as the eurozone.
Estonia
Buoyant growth in Estonia’s GDP is starting to
face capacity constraints. Nominal wage growth
reached an average of almost 8.0 per cent year on
year in the first half of 2019, causing unit labour
costs to grow faster than labour productivity. This
reflects a shrinking labour market and raises
concerns about Estonia’s future competitiveness.
While consumption stayed strong in 2018, an
increasing part of demand was directed towards
imports, resulting in growth deceleration to 4.8
per cent. In the first half of 2019, moderating
household consumption slowed growth further,
to 4.2 per cent year on year. However, these
remain impressive numbers and short-term GDP
growth will remain robust, at 3.2 per cent and 2.6
per cent in 2019 and 2020 respectively. Negative
risks to the outlook come from the intensification
of trade tensions and from weaker export
demand in advanced economies, especially in the
Nordic region.
Hungary
Investment acceleration and continuously strong
household consumption have been the key drivers
 REGIONAL UPDATES

of the recent strong economic growth. Following wages will continue to support consumption
the 5.1 per cent GDP growth rate in 2018, the growth.
Hungarian economy continued to grow at a
similar pace in the first half of 2019. Consumption Lithuania
was fuelled by strong nominal wage growth
GDP growth, at 3.6 per cent in 2018 and 4.0 per
(above 10 per cent in annual terms) in both the
cent year on year in the first half of 2019,
private and public sectors. Salaries of employees
continues to be supported by vibrant household
in the central public administration were raised on
consumption, investment and exports. Recent
average by 30 per cent from January 2019. With
labour tax reforms have effectively reduced the
such a strong start, growth for 2019 as a whole is
tax wedge in 2019 and, amid rising wages and low
expected to remain very solid at 4.6 per cent,
unemployment rates, have provided an additional
notwithstanding concerns about the car industry
boost to household spending. Investment growth
in Germany, to which Hungary is vulnerable. In
is strong as a result of better utilisation of EU
2020, it is anticipated that GDP growth will
funds. Net exports have also positively
moderate to 3.1 per cent. This slowdown will be
contributed to growth, especially in the first half
partially offset by domestic demand, powered by
of 2019, despite the weaker external environment
a double-digit recovery in corporate credit and in
and a strong base effect. Structural factors and
wage hikes that remain strong. The latter is largely
demographics are the main risks over the medium
a result of the tightening labour market, caused
term. In the short term, GDP growth is expected
by the fall in the working-age population and
to reach 3.6 per cent in 2019 and 2.3 per cent in
mounting skill-mismatches. The absorption of EU
2020. Domestic demand will likely remain the key
funds will be likely to further underpin investment
growth engine, driven by strong household
in 2019, but reduced EU fund inflows will create a
consumption and investment, as companies
drag on public investment from 2020 onwards.
continue to invest in automation amid mounting
Trade disputes and the economic performance of
labour shortages. Greater investment in
Hungary’s main trading partners, such as
productivity could partially offset negative
Germany, are negative risks to that scenario.
demographic trends associated with ageing and
Latvia emigration.

After reaching 4.8 per cent in 2018, GDP growth Poland

slowed substantially to 2.4 per cent in the first
Poland’s economy grew by 5.1 per cent in 2018,
half of 2019. In 2018, investment-driven imports
the highest growth rate in central Europe and the
robustly outperformed weak exports, but in the
Baltic states, then slowed to 4.4 per cent year on
first half of 2019, all domestic demand
year in the first half of 2019. Domestic demand
components slowed. Labour shortages and
was the principal engine of growth, driven by
restrained bank financing will continue to weigh
recovered investment, continuously robust
on growth. GDP growth is projected to decelerate
household consumption and especially by strong
to 2.6 per cent in 2019 and then further to 2.2 per
government consumption, at 4.7 per cent growth
cent in 2020. The slowdown is due to a
in the first half of 2019. Significant wage increases
combination of factors, including decelerating
in the economy, averaging 6.7 per cent year on
economic growth in advanced European
year in the first half of 2019, substantial
countries, adverse demographics and the reduced
government transfers and favourable labour
availability of sources of finance, such as EU funds
market trends have all contributed to sustaining
and bank credit. However, additional rises in
household disposable incomes and consumer

22

confidence. Robust growth will continue but the
weakening external environment constitutes a
negative risk. The Polish economy is forecast to
grow by 3.9 and 3.5 per cent in 2019 and 2020,
respectively. Rising household disposable incomes
will drive further strong consumption, although
the expected generous hikes in minimum wages
will be likely to induce higher inflation, boosted by
the anticipated rise in energy prices from next
year. In addition, if plans to raise the minimum
wage to 70 per cent of the average wage within
the next five years were to materialise,
employment could be hit, especially in small and
medium-sized enterprises (SMEs). For the time
being, investment will remain supported by
substantial inflows of funds from the EU and
government-led investments, including those
financed by savings in the occupational pension
scheme. Nevertheless, the approaching slowdown
in Poland’s key trading partners in the EU
represents an important risk to that scenario.
Slovak Republic
Domestic demand, particularly household
consumption and investment, continued to
underpin GDP growth of 4.0 per cent in 2018.
However, a slowdown was evident in the first half
of 2019, with the economy growing by just 3.0 per
cent year on year. Amid weakening external
demand in western Europe, export growth lost
momentum and reached 3.9 per cent in the first
half of the year. Inflation accelerated to 2.5 per
cent in 2018, and further to 3.0 per cent in July
2019. Service price inflation saw the greatest
hikes, in line with expectations of rapidly rising
wages and positive consumer confidence. External
uncertainties are the main risks to further
economic growth, especially for the automotive
industry, including its SME-led supply base. GDP
growth is likely to continue to be driven by
domestic demand, although its strength will
moderate. We expect growth to slow to 2.5 per
cent in both 2019 and 2020, representing a large
downward revision (of 1.1 percentage points in
23
REGIONAL UPDATES
2019 and 0.8 percentage point in 2020). Key
negative risks include the possibility of a hard
Brexit and the eurozone’s economic slowdown. By
contrast, improved absorption of EU funds
provides potential for an upside.
Slovenia
The economic recovery has continued in 2019 but
at a somewhat slower pace than in the previous
two years, in which growth averaged 4.5 per cent,
among the fastest growth rates in the EU. The
economy expanded by 2.9 per cent year on year
in the first half of 2019. The growth was driven by
domestic demand, underpinned by both higher
investment and private consumption. The strong
labour market (with unemployment at just 4.0 per
cent as of June 2019), combined with earnings
growth (driven also by an increase in the
minimum wage), contributed to rising private
consumption. Increased growth in corporate
loans, amid favourable financing conditions, as
well as a better rate of capacity utilisation,
supported investments, while economic
sentiment was above its long-term average.
Exports continued their strong performance and
grew by almost 9 per cent in the first half of 2019,
but the growth of imports outpaced that of
exports. The declining trend of public debt is
expected to continue, as the fiscal position has
improved significantly in recent years. The budget
was in surplus in 2018 for the first time since
independence which, combined with strong
nominal GDP growth, led to a decline in the public
debt-to-GDP ratio from a peak of 83 per cent in
2015 to an expected 66 per cent as of end-2019.
The economy is projected to grow at 3.0 per cent
in 2019, dropping slightly to 2.8 per cent in 2020.
The risks to the downside come from weaker
demand from main trading partners, as the
country’s economy, which is highly integrated into
eurozone supply chains, relies significantly on
exports.

South-eastern EU
Growth remains fairly robust in most of this
region, with private consumption driving growth
in Bulgaria, Cyprus and Romania. In Greece, the
gradual recovery of recent years has continued at
a slow pace in 2019, but short-term prospects are
favourable given the strong fiscal performance,
improved prospects for medium-term debt
sustainability and a new momentum for reform.
Bulgaria
The Bulgarian economy grew robustly at 4.2 per
cent year-on-year in the first half of 2019.
Household consumption continued to be the main
source of growth, fuelled by strong lending
activity, increased earnings and a higher
employment rate amid the tightening labour
market. Unemployment was down to almost 4.0
per cent as of June 2019, while nominal wages
kept growing at high single-digit rates. The
government raised the monthly minimum wage
by 10 per cent in January 2019, to €286.
Investment also continued to contribute positively
to growth, although at a slower pace than in 2018.
Meanwhile, net exports also boosted growth, as
exports grew at a faster rate than imports, which
almost stagnated. Government spending rose in
2019, mainly due to a one-off large army-related
expense, and the budget may be in deficit after
three consecutive years of budget surpluses.
Public debt stands at around 21.0 per cent of GDP,
one of the lowest percentages in the EU. The
economy is expected to grow by a solid 3.7 per
cent in 2019 and 3.0 per cent in 2020, broadly in
line with the country’s current growth potential.
Growth is likely to be underpinned by private
consumption, which typically fuels economic
activity. Investment should also contribute
positively to growth, as the absorption of EU
funds is accelerated towards the end of the 2014-
20 funding period and the government embarks
on a major energy investment cycle. Key risks to
the outlook are: prolonged weakness of major
24
REGIONAL UPDATES
trading partners, particularly that of the eurozone,
and an exacerbation of current labour shortages.
Cyprus
In 2018, GDP growth remained strong at 3.9 per
cent. Economic growth slowed in the first quarter
of 2019 to 3.4 per cent year on year, mainly
reflecting weaker exports. Investment continues
to be one of the main drivers of growth. The
increase of private consumption is another
significant driver, with a robust labour market
recovery and wage increases. Unemployment
continued its uninterrupted downward trend
since 2013, reaching 6.8 per cent in August 2019.
In 2018, net exports made a small positive
contribution to growth, helped by a strong
tourism season, but in 2019 the sector is showing
signs of a slowdown, with a decrease in tourist
arrivals of 1.1 percent over the first five months of
2019. Public debt was still above 100 per cent of
GDP at end-2018, but strong GDP growth and
primary surpluses should allow the debt-to-GDP
ratio to resume its downward path from this year
onwards. Cyprus has returned to investment
grade status, but levels of non-performing loans
are still among the highest in the EU. Looking
ahead, a less favourable external environment
and persistent uncertainties will weigh on the
construction sector and economic activity linked
to foreign companies. A sharper-than-expected
slowdown in the euro area or a hard Brexit could
also harm the prospects of the Cypriot economy.
However, rising employment and higher wages
are expected to boost disposable income and
support private consumption. Public consumption
is also expected to grow. Taking into account all
the relevant factors, we expect growth to slow
moderately in 2019 and 2020 to 3.2 per cent and
2.8 per cent respectively.
Greece
The economic recovery that began in 2017
continued in 2018 and the first half of 2019,
although at a slightly slower pace than expected

with 1.9 per cent GDP growth in 2018, and 1.5 per
cent growth year on year in the first half of 2019.
Exports of goods and services remain by far the
key driver of growth, private consumption retains
a positive impact on growth, and unemployment
continues to decline, down to 17 per cent in
August 2019. The general government primary
surplus was 4.4 per cent of GDP in 2018, well
above the 3.5 per cent target, and is on track to
achieve this target in 2019. Capital controls have
been fully lifted as of 1 September 2019. These
improved conditions have boosted market and
investor confidence, reflected in a sharp decline in
2019 of bond yields, and could ultimately lead to
an increase in business investment, with the
economic sentiment indicator reaching a 12-year
record high level of 108.4 in August 2019. Looking
ahead, the main drivers of growth in the short
term will continue to be exports and private
consumption. Investment is the key to a full
economic recovery and is expected to rise as the
health of the financial sector improves. Non-
performing exposures8 remain exceptionally high
but should lower significantly over time, an
expectation helped by the October 2019 approval
by the European Commission of a new asset
protection scheme. Short-term growth is
projected at 2.0 per cent in 2019 and 2.4 per cent
in 2020. However, economic growth depends on
many factors, including the magnitude and pace
of the reduction in non-performing exposures, as
well as the capacity of the government to
implement reforms.
Romania
The economy is estimated to have accelerated
from an already strong 4.0 per cent growth in
8
Non-performing exposures include loans more than
90 days past due and loans whose debtor is assessed as
unlikely to pay its credit obligations in full without
realization of collateral, regardless of the existence of
any past due amount or of the number of days past
due. It is thus a broader measure than non-performing
loans, which are loans more than 90 days due only.
25
REGIONAL UPDATES
2018 to 4.6 per cent year on year in the first half
of 2019. Private consumption has made the
highest contribution to growth, supported by the
tightening labour market, pro-cyclical fiscal policy,
including hikes in public sector salaries, in
pensions and the minimum wage, and an
increased pace of retail lending. The
unemployment rate, at about 4 per cent as of
June 2019, is the lowest in a decade, making
recruitment difficult and further driving up wages.
Fuelled by increased absorption of EU funds, as
well as corporate lending, the contribution of
investment to growth has also been positive. Twin
deficits have increased in the wake of government
pro-cyclical stimulus measures. Despite growing
exports, the trade deficit has been widening since
2015, as rising domestic demand has driven up
imports even more. The nominal budget deficit
reached 3 per cent of GDP in 2018 (second-
highest in the EU) and is expected to exceed that
level in 2019. On the positive side, general
government debt is still low by regional standards,
at around 35 per cent of GDP, and has been stable
for some time, thanks to high nominal growth.
Although inflation gradually receded to 3.3 per
cent in December 2018, following three
consecutive policy rate rises, it has risen to an
average of 3.9 per cent in the first half of 2019,
again above the central bank’s upper target.
Growth is expected at 4.0 per cent in 2019,
moderating to 3.2 per cent in 2020 because of
higher perceived investment risks and growing
external imbalances. Key risks to the outlook are
linked to weakness in major trading partners, not
least the eurozone, rising labour shortages and
domestic political and reform uncertainty.

Western Balkans
Growth in the Western Balkans region slowed in
the first half of 2019 to 2.9 per cent year on year
(down by more than 1 percentage point from
2018). The deceleration was recorded in all
economies, with the exceptions of Kosovo and
North Macedonia. Despite the eurozone
slowdown, FDI inflows to the region remain
strong, with these economies benefiting from their
favourable geographical location, skilled labour
force and lower wage costs than those in central
Europe.
Albania
After accelerating to 4.1 per cent in 2018, growth
has slowed in 2019. During the first half of 2019,
the economy expanded by 2.4 per cent year on
year. The slowdown was mainly a consequence of
weaker power generation, combined with the
high base effect from 2018, while tourism
remained an important contributor. On the
expenditure side, investment and export growth
decelerated too. Unemployment continued to
decline gradually but remained at double-digit
levels, averaging 11.8 per cent in the first half of
the year. At the same time, inflation decreased to
1.5 per cent on average, staying below the central
bank’s target of 3.0 per cent for the eighth
consecutive year. As a result, the central bank’s
key policy rate has remained at a record low of
1.0 per cent since June 2018. Despite primary
surpluses in recent years, public debt remains
high (66.9 per cent of GDP in June 2019, excluding
arrears). The economy is projected to expand by
2.8 per cent in 2019, driven mainly by private
consumption, and to accelerate to 3.5 per cent in
2020. The moderation in growth relative to the
most recent years is due mainly to a combination
of the economic slowdown of Italy and the rest of
the eurozone, the further delay in starting EU
membership talks, and internal risks associated
with both contingent liabilities stemming from
unsolicited public-private partnership
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REGIONAL UPDATES
programmes (lacking transparency and
accountability) and the ongoing political
instability.
Bosnia and Herzegovina
The economy has decelerated in 2019. In the first
half of the year, GDP growth was 2.7 per cent year
on year, down from 3.6 per cent in 2018, primarily
due to a slowdown in exports and increase in
import growth. At the same time, private
consumption growth picked up to 3 per cent year
on year, twice the growth rate seen in the
previous two years. In the first quarter of 2019,
the unemployment rate was lower by 2.7
percentage points than in the year before, but at
15.7 per cent it remained high, especially for
young people (34 per cent). The inflation rate
decelerated from 1.6 per cent year on year at the
end of 2018 to 0.3 per cent in August 2019. This
decline was primarily led by the slowdown in the
growth of transport prices. GDP is expected to
expand by 3.0 per cent annually in both 2019 and
2020. Risks to the projection lie on the downside
and relate mainly to uncertainty about reforms
(primarily in terms of improving the business
climate and standards of governance, and
advancing the country’s EU approximation
agenda) and to the economic slowdown in the
European Union.
Kosovo
Relatively strong economic growth has continued
in 2019. After 3.8 per cent GDP growth in 2018,
the economy expanded by 4.2 per cent year on
year in the first half of 2019. Growth was primarily
driven by investment, but private consumption
was also an important contributor. However,
economic growth is translating very slowly into
higher employment. In the second quarter of
2019, the employment rate stood at 30 per cent,
around 1 percentage point higher than a year
before. Meanwhile, the unemployment rate fell
by 4 percentage points year on year, but at 25 per
cent it remained high, especially for young people

(close to 50 per cent). Inflation, which started to
increase in the second half of 2018 (possibly also
in relation to the imposition in November 2018 of
a 100 per cent tax on goods imported from Serbia
and Bosnia and Herzegovina), peaked in May 2019
at 3.4 per cent, sliding to 2.4 per cent in
September 2019. GDP growth in 2019 and 2020 is
expected to stand at 4.0 per cent annually, with
domestic demand remaining the key driver of
growth. The risks to the projection are balanced.
While upside risks relate to the possible start of
construction of a major new power plant and to
faster reform progress, weaknesses in public
investment management, the economic
slowdown in the European Union, domestic
political uncertainty and deteriorating relations
with neighbours represent the main downside
risks.
Montenegro
The economy’s growth rate has slowed in 2019. In
the first half of the year, GDP growth fell to 3.1
per cent year on year, from 5.1 per cent in 2018.
The deceleration is primarily due to large
investment projects (the Bar-Boljare highway and
the power link to Italy) approaching completion.
The first half of 2019 was also marked by poor
industrial performance, due to declines in
electricity production and manufacturing sector
output. On the other hand, the tourism sector has
continued to perform well. The current account
deficit is expected to remain large and at a similar
level to that seen in 2018, at around 17 per cent
of GDP. Price growth has slowed since the second
half of 2018, primarily on the back of falling prices
for tobacco, clothing and footwear, but also due
to decreasing (oil price-related) transport prices.
The average year-on-year inflation rate decreased
from 2.6 per cent in 2018 to 0.3 per cent in the
first nine months of 2019. The period from June to
September 2019 has even been marked by
deflation (-0.2 per cent monthly, on average).
With the completion of large investment projects
and ongoing fiscal consolidation, growth is
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REGIONAL UPDATES
projected to moderate significantly, to 2.8 per
cent in 2019 and 2.6 per cent in 2020. However,
private investment in tourism and energy is likely
to stay high. The risks to the projections mainly
relate to weaker growth in the European Union.
North Macedonia
The economy has continued to recover after the
resolution of the political crisis in 2017. Following
a 2.7 per cent increase in 2018, the growth rate
accelerated to 3.6 per cent year on year in the
first half of 2019. Growth was driven by domestic
demand, primarily the recovery of investment.
The rates of total and youth unemployment went
down, although they were still high at 18 and 35
per cent in the second quarter of 2019,
respectively (down from 21 and 48 per cent in the
same quarter of 2018). Inflation remained
subdued at 1 per cent in the first nine months of
2019. Growth is projected to pick up to 3.2 per
cent in both 2019 and 2020, supported primarily
by the rebound in investment. The resolution of
the name issue with Greece has helped to
strengthen investor confidence, as confirmed by
Fitch’s upgrade in June 2019 of the country’s
sovereign rating to BB+. However, current risks to
the projection are more on the downside. These
are mainly related to the delayed start of EU
accession talks, which may weaken reform
momentum within the country, and the economic
slowdown of the European Union.
Serbia
Growth has subsided during 2019. Unfavourable
trends in industrial production continued in the
first half of 2019, with industrial output declining
by 2.0 per cent year on year on the back of falling
production in mining and manufacturing, while
utilities and agricultural output stagnated. As a
consequence, the overall GDP growth rate slowed
to 2.8 per cent year on year in the first half of
2019, from 4.4 per cent in 2018. The 2019 budget
envisages a small deficit (0.5 per cent of GDP),
while public debt stood at 54 per cent of GDP at

the end of June 2019. Inflationary pressures have
been low, also thanks to the strong exchange rate.
Inflation initially picked up in 2019, reaching 3.0
per cent year- on year in April, but then fell back
to 1.1 per cent in September, undershooting the
lower bound of the central bank’s target band (3 ±
1.5 per cent). After keeping the policy rate
unchanged at 3.0 per cent for more than a year,
the central bank cut the rate again in the third
quarter of 2019, to 2.5 per cent. GDP is expected
to expand by 3.2 per cent in 2019 and 3.5 per cent
in 2020. Domestic demand should remain the
main growth driver, while net exports are most
likely to continue their negative contribution. The
economic slowdown of the main trading partner,
the European Union, and the slow pace of reforms
within the country might act as a drag on growth
in the near term and make it more volatile. While
Kosovo’s introduction of a 100 per cent tariff on
Serbian products may have a negative effect on
exports of up to €400 million a year, reliable
assessments of this effect are not yet available.
Eastern Europe and the Caucasus
Economic growth in eastern Europe and the
Caucasus (EEC) averaged 3.0 per cent in the first
half of 2019, on a par with the previous year,
albeit with significant variation across the region.
Private consumption continued to be the core
driver of growth, supported by rising real
disposable incomes that have been converging to
the pre-crisis level. Thanks to improved
management of public finance, fiscal deficits
remained at bay and public-debt levels continued
to decline. A benign inflation environment and
stable exchange rates in most countries enabled
the start of a loosening cycle of monetary policy
(with the exceptions of Georgia and Moldova).
Economic growth in the EEC region is projected to
stabilise at 2.9 per cent in both 2019 and 2020.
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REGIONAL UPDATES
Armenia
GDP grew by an estimated 6.8 per cent year on
year in the first half of 2019, driven by
strengthened household consumption which is
benefiting from a stronger inflow of money
transfers (up 9.3 per cent in the first seven
months of 2019). Exports and capital investments
both grew in the first half of 2019, albeit at
somewhat lower rates than those seen in 2018.
Preliminary indicators of economic activity point
to further growth acceleration in July and August.
Fiscal balances continued to improve. Improved
tax compliance supported a steep increase in tax
revenues in 2019, with accrued tax revenues and
state duties rising by 21.3 per cent year on year in
the first eight months of 2019, bringing the fiscal
balance to a surplus of 1.5 per cent of forecasted
2019 GDP in the same period. Inflation declined
from 2.5 per cent in 2018 to 1.6 per cent in the
first nine months of 2019 (0.5 per cent in
September), affected by the contractionary fiscal
policy and deflationary pressures stemming from
the external sector. This prompted the Central
Bank of Armenia to lower its refinancing rate
twice consecutively, from 6 per cent in January
2019 to 5.5 per cent in September 2019, bringing
the policy rate to its lowest level since the
beginning of 2010. The mining and quarrying
sectors, the largest contributors to exports, are
expected to boost overall GDP in the second half
of 2019 due to the base effect from the strong
output contraction in the second half of 2018.
Armenia’s GDP is expected to grow by 6.0 per
cent in 2019 and by 5.0 per cent in 2020.
Azerbaijan
The economic recovery that began in 2018
continues in 2019. GDP growth accelerated from
1.4 per cent in 2018 to 2.4 per cent year on year
in the first eight months of 2019, supported by
the strengthening of sectors other than
hydrocarbons. The non-oil and gas areas of the
economy grew by 3.0 per cent year on year in the

same period, up from 1.9 per cent in 2018.
Indicators of output growth in non-oil and gas
industries, agriculture and services are all positive
so far in 2019. The current account remains in
surplus, though the trend of its widening halted in
the first half of 2019 due to weak exports of
services and to near-stagnation in the oil and gas-
sector balance. Credit activity is also recovering
and inflation was low at 2.6 per cent year on year
in the period January-September 2019, allowing
the central bank to cut the policy rate by 200 basis
points from January to October. However, the
percentage of overdue loans and the level of
dollarisation in the economy remain significant,
constraining credit activity and the effectiveness
of monetary policy. GDP is likely to expand by 2.8
per cent in 2019 and by 2.4 per cent in 2020. The
economy’s resilience to external shocks is
supported by significant liquidity buffers, as the
combined official foreign exchange reserves of the
Central Bank of Azerbaijan and assets of the State
Oil Fund of Azerbaijan are approximately equal to
the country’s GDP.
Belarus
The GDP growth rate decelerated to an estimated
0.9 per cent year on year in the first half of 2019.
Disruptions in the supply of oil from Russia to
Belarusian refineries in the second quarter of
2019 caused stagnation in the manufacturing
sector and negatively affected the volume of
exports. The growth of private consumption
slowed but remains solid at close to 6 per cent
year on year, driven by the continued robust
growth of disposable income (up by 7 per cent in
the same period). The current account deficit
increased slightly in the first half of 2019 but
remained relatively low at around 1.3 per cent of
the estimated annualised GDP. The trade balance
surplus shrank as a consequence of a deepening
deficit in the goods balance that was only partially
offset by a rising surplus in the balance of
services. Substantial improvements in debt
finance inflows contributed to an increase in
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REGIONAL UPDATES
international reserves during 2019 by US$ 1.7
billion to US$ 8.8 billion as of 1 October 2019, but
coverage remains relatively low at just 2.6 months
of imports. These developments led to a broadly
stable exchange rate in the first nine months of
the year. Inflation fell below 5 per cent in 2018 for
the first time since independence but has since
risen to 5.3 per cent in September 2019 on the
back of increases in regulated prices and tariffs.
Economic growth is expected to slow to 1.3 per
cent in 2019 and 1.2 per cent in 2020, but the
growth outlook depends on the prospects for
Belarus to receive compensation for the new
taxation system being introduced by Russia,
known as the “tax manoeuvre”, the implications
of which remain unclear.
Georgia
GDP grew by an estimated 4.7 per cent year on
year in the first half of 2019. Inflows of money
transfers are growing for the fourth consecutive
year and credit growth remains robust, supporting
private consumption. Exports of goods (in nominal
US dollar terms) increased by 12.4 per cent year
on year in the first eight months of 2019. The
tourism sector remains strong despite the Russian
ban, in force since July 2019, on direct flights to
and from Georgia. The overall number of
international visitors increased by 5.9 per cent in
the first nine months of 2019, compared with a
rise of 11.1 per cent in 2018. However, these
events, coupled with domestic political
uncertainties, have increased pressure on the
domestic currency. The Georgian lari depreciated
by 9.4 per cent in the period January to
September 2019. Inflation has increased from 2.6
per cent in 2018 to 6.4 per cent in September
2019 on the back of the currency depreciation and
an increase in excise taxes earlier in the year. This
prompted the National Bank of Georgia to
intervene on the foreign exchange market, and it
has raised the monetary policy rate by 200 basis
points, reaching 8.5 per cent in October. Official
international reserves increased by 9.5 per cent

relative to the beginning of the year and stood at
US$ 3.6 billion in September 2019, providing
around four months of import coverage. The
Georgian economy is forecast to grow by 4.5 per
cent in both 2019 and 2020.
Moldova
GDP growth accelerated from 4.0 per cent in 2018
to 5.2 per cent year on year in the first half of
2019. The broad-based growth on the production
side was led by construction, while agriculture
was the only major sector with negative
dynamics. Fixed capital investments, growing at
20.3 per cent, remained the main driver to
economic growth on the expenditure side.
Meanwhile, the growth of household
consumption decelerated to just 1.8 per cent year
on year. Strengthening growth of exports and
weakening growth of imports have reduced the
negative contribution of net exports to GDP
growth. Nevertheless, the current account deficit
has widened amid a slight increase in the trade
deficit, an improving primary income surplus and
a declining surplus of secondary income. A large
part of the deficit has been financed by increased
FDI inflows and, to a lesser extent, by debt
financing. Official reserve assets remained almost
unchanged at US$ 2.9 billion as of September
2019, providing more than five months of imports
coverage. Annual inflation slowed to 0.9 per cent
in December 2018, but then accelerated to 6.3
per cent in September 2019, driven by rising
regulated prices and imported-food prices. This
development prompted the National Bank of
Moldova to react by raising the main policy rate
twice, in June and July, from 6.5 to 7.5 per cent.
IMF support remains crucial for anchoring the
macroeconomic stability of Moldova. After
disagreements between the IMF and the previous
government, staff-level agreement on the fourth
and fifth reviews of the current programme was
reached in July 2019, subsequently resulting in the
allocation of a new US$ 46.1 million tranche.
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REGIONAL UPDATES
Moldova’s economy is forecast to grow by 3.8 per
cent in 2019 and 4.0 per cent in 2020.
Ukraine
Economic growth remained resilient, despite the
risks coming from the twin election cycle. After
gaining momentum in 2018, Ukraine’s real GDP
growth accelerated from 3.3 per cent in 2018 to
3.6 per cent year on year in the first half of 2019.
The economy continued to benefit from robust
private consumption, which grew at 11.3 per cent
on the back of strong real growth of disposable
income. Fixed capital formation increased by 12.0
per cent year on year in the first half of 2019,
driven by the booming construction sector.
Meanwhile, real export growth is up by 5.6 per
cent and imports by 7.8 per cent year on year in
the same period. This has led to a widening trade
deficit, but the current account remains stable,
helped by substantial increases in services and
primary income surpluses. Significant private
capital inflows on the domestic government
securities market led to a 15.0 per cent
appreciation of the local currency (relative to the
US dollar) in the period January to September
2019. The abundance of foreign portfolio capital
inflows helped to increase Ukraine’s official
reserve assets to US$ 21.4 billion as of 1 October
2019, covering 3.5 months of imports, despite
large debt repayments in the same period.
Inflation slowed to 7.5 per cent in September
2019 but remains above the 5 per cent target of
the National Bank of Ukraine. The key policy rate
has come down from 18.0 per cent in April to 15.5
per cent in October. Bearing in mind the large
public sector foreign exchange debt repayments
that will fall due in the next two years, the new
IMF reform-oriented programme is crucially
important for anchoring investors’ expectations
and supporting macroeconomic stability.
Ukraine’s economic growth is forecast to stay at
3.3 per cent in 2019 and slightly accelerate to 3.5
per cent in 2020.

Turkey
The Turkish economy exited recession at the
beginning of 2019, as the policy tightening that
had ushered in a recession during the second half
of 2018 gave way to stimulus in the period before
the municipal elections. Leading indicators
suggest that some of this momentum has
subsequently been sustained.
At the same time, there has been a significant
improvement in macroeconomic stability. The
current account evolved from a deficit of 6.5 per
cent of GDP in mid-2018 to record a small surplus
by mid-2019, largely driven by import
compression linked to the sharp slowdown in the
economy. This adjustment, combined with a
supportive global backdrop as central banks in
advanced economies moved into easing mode,
and the failure of several geopolitical concerns to
materialise, helped bring some stability to the lira.
The stabilisation of the lira, combined with high
real policy rates and the impact of base effects,
have resulted in a sharp decline in inflation in
recent months. A substantial rate hike and
consequent sharp slowing of the economy helped
bring down inflation from its 15-year high of 25
per cent in October 2018 to single-digit levels in
September 2019. The central bank has cut rates
significantly, by a total of 1,000 basis points since
August, but it needs to moderate the pace of
future rate cuts in order to avoid a resurgence of
inflation.
The municipal elections saw a significant
loosening of fiscal policy, and the recent release
of the latest New Economic Programme has
relaxed deficit targets for 2019 and 2020, now
foreseeing a budget deficit of 2.9 per cent of GDP
in both 2019 and 2020, significantly higher than
the previously forecast 1.8 per cent. Although
public finances are robust, with a low public debt
of around 30 per cent of GDP, the long-term
impact of growing contingent liabilities in the
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REGIONAL UPDATES
form of revenue guarantees to public-private
partnership projects and credit guarantees under
the Credit Guarantee Fund is unknown.
The risk of a banking crisis has eased with the
stabilisation of the lira. Bank capitalisation is
adequate, helped by capital-raising exercises
conducted by several banks. However, asset-
quality issues are holding back private banks from
lending, despite several government schemes that
seek to restart the credit cycle in order to boost
growth. In response to this problem, the banking
regulator recently introduced measures requiring
banks to recognise problem assets that will
increase the ratio of non-performing loans to
around 6.3 per cent. But a more wide-ranging
response is needed to deal with the issue.
Despite some stabilisation in recent months, the
economic situation remains fragile. The response
to Turkey’s recent incursion into Syria serves as a
reminder that geopolitical tensions are never far
from the surface. With reserves remaining low
and external financing requirements still high,
despite the current-account rebalancing, such
tensions can have a significant impact on the
economy. Recovery from the ongoing slowdown is
likely to be gradual. A contraction of around 0.2
per cent is expected in 2019 and the economy
should return to a growth rate of 2.5 per cent in
2020, although given the unpredictable domestic
and geopolitical environment, significant
uncertainty remains around this forecast.
Russia
The Russian economy grew by 0.7 per cent year
on year during the first half of 2019, following
growth of 2.3 per cent in 2018. Household
consumption continued to drive growth but was
subdued on account of stagnant real wages and a
2 percentage point increase in VAT introduced in
January 2019. Weaker external demand, lower oil
prices and a stronger rouble since the start of the
year have negatively affected net exports, while

sanctions and continued tight fiscal policy have
constrained public and private investment.
Tight economic policies that helped secure
macroeconomic stability have recently turned
more neutral, in recognition of their negative
impact on growth. The authorities continue to
follow the fiscal rule adopted in 2017, which
mandates the transfer of oil revenues in excess of
a US$ 40 per barrel threshold to the National
Wealth Fund, but recently the rule was relaxed to
allow a 0.5 per cent deficit at this threshold. There
will soon be scope to start investing part of the
National Wealth Fund, although how this can be
done without sparking inflation remains subject to
debate.
Monetary policy has also turned more neutral in
recent months. The inflationary impact of a 2
percentage point VAT increase introduced in
January 2019 was more modest than expected,
and inflation has been declining from a peak of
5.3 per cent in March 2019 as a result of falling
real household incomes and a stronger rouble.
Declining inflation and weaker-than-expected
output has led the central bank to cut its policy
rate three times by a total of 75 basis points since
June 2019.
The banking sector remains a source of risk for the
economy. While the system-wide capital
adequacy ratio is stable at around 12 per cent,
asset quality remains a problem, with the non-
performing loan ratio standing at 10.4 per cent in
March 2019. The fast growth of unsecured
household credit has raised concerns and the
Central Bank of the Russian Federation has
introduced macro-prudential measures to address
this. In the past year, the government has
continued the process of banking sector
consolidation, with more than 500 banks having
been closed down since 2013. However, this has
led to an increasing concentration of the banking
sector in state hands, with over 70 per cent of
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REGIONAL UPDATES
bank assets now owned by state-owned or state-
controlled banks.
The growth outlook is expected to improve
slightly, starting with the second half of 2019,
thanks to more supportive monetary policy and
the implementation of the 13 national projects.
However, private investment is likely to remain
weak, given the continuing negative impact of
sanctions imposed by the European Union and the
United States of America, and exports are likely to
be held back by the weaker global trade
environment. A growth rate of 1.1 per cent is
expected for 2019, followed by 1.7 per cent in
2020. Key risks to the outlook include the
possibility of more severe sanctions and a sharp
fall in oil prices, which would lead to currency
depreciation, impacting the already weak asset
quality of the banking sector.
Central Asia
Economic growth in Central Asia accelerated
slightly in the first nine months of 2019.
Uzbekistan leads the region in corporate credit
growth, investment and export expansion, but
trade performance improved in all countries,
except Kazakhstan, where exports temporarily
declined due to repair works in major oilfields.
Remittances from Russia contracted by 2 per cent
in the first half of 2019, mostly to the Kyrgyz
Republic and Tajikistan. This did not significantly
affect domestic demand, thanks to increased
consumer lending. Exchange rate depreciations
have been limited in most countries, partly due to
central bank interventions. A lack of
diversification, governance issues and weak
banking sectors are key vulnerabilities that
continue to constrain growth throughout Central
Asia. Barring major adverse developments, the
region as a whole is forecast to expand on average
by 4.9 per cent in 2019 and 4.7 per cent in 2020.

Kazakhstan
Real GDP growth accelerated slightly to 4.3 per
cent year on year in the first nine months of 2019,
from 4.1 per cent in the same period of 2018,
enabled by expansions in construction, trade and
transport. Gains in oil production moderated due
to planned repair works at the Kashagan oilfield.
Coupled with lower oil prices, this has led to a
decline in exports in the first eight months of
2019. Fixed investment increased by 9.7 per cent
in the first nine months of 2019, partly related to
the construction of the Saryarka gas pipeline.
Rising real wages, fuelled by increases in
minimum wages and public sector salaries,
continue to support private consumption and
increased imports. Despite market pressures, the
depreciation of the exchange rate in the first
three quarters of 2019 has been limited. Rising
inflationary pressures prompted the central bank
to increase the base rate by 25 basis points to
9.25 per cent in September 2019. Inflation
reached 5.5 per cent in October 2019. Credit
growth remains slow (1 per cent year on year in
August 2019), with loans growing only in the retail
sector. In August 2019, the central bank initiated
an independent asset quality review of 14 (out of
28) banks in order to better understand situation
with regard to problem loans and to identify
additional provisioning needs. GDP growth is
projected to reach 3.9 per cent in 2019 and 3.6
per cent in 2020, as social transfers and rising real
wages will further sustain domestic demand. On
the supply side, growth will be mainly driven by
non-tradeable services, while the contribution of
mining is expected to moderate.
Kyrgyz Republic
GDP growth reached 6.1 per cent year on year in
the first three quarters of 2019, significantly up
from 3.5 per cent in 2018, reflecting strong gains
in mining and manufacturing and the low base
effect. Excluding the Kumtor gold mine, GDP
growth in the first three quarters of 2019 was 3.2
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REGIONAL UPDATES
per cent year on year, slightly higher compared
with same period of 2018, when the economy
grew by 2.8 per cent. Growth was supported by
an acceleration in fixed investment growth (6.8
per cent in the first three quarters of 2019 from
0.8 per cent a year earlier). Exports increased by
11 per cent in US dollar terms in the first eight
months of 2019, mainly due to higher levels of
gold shipments, while imports declined by 9 per
cent and remittance inflows weakened by 12 per
cent year on year. Credit continued to expand at a
high pace (up 15 per cent year on year in
September 2019). Annual inflation nevertheless
remained low in September 2019 at 2.3 per cent,
significantly below the target band of 5-7 per
cent. The low inflationary environment prompted
the central bank to cut the policy rate twice in
2019, by 25 basis points each time – in February
and May – to 4.50 per cent and 4.25 per cent,
respectively. The exchange rate remained stable
in nominal terms in 2018 and 2019 but continued
to appreciate in real effective terms. GDP growth
is expected to reach 4.3 per cent in 2019, driven
by increased gold production. In 2020, economic
growth is projected to ease to 3.7 per cent due to
slower gains in mining. Public investment and
private consumption are expected to support
growth in the short term.
Mongolia
Strong growth rates are continuing in Mongolia,
with the economy expanding 7.3 per cent year on
year in the first half of 2019 as compared to 6.9
per cent in the first half of 2018. Growth was
enabled by increases in exports (primarily coal)
and fixed investment. Propelled by rapid growth
of credit, private consumption continued to rise in
the first half of 2019. Inflation accelerated to 9 per
cent in September 2019, above the central bank’s
8.0 per cent target, reflecting growing domestic
demand and higher food prices. The central bank
has maintained its policy rate at 11.0 per cent
since November 2018. Exchange rate pressures
eased in the first half of 2019 on the back of a

narrowing current account as the growth of
exports outpaced that of imports. This, coupled
with central bank interventions, has stabilised the
exchange rate. Gross international reserves
continued to rise and reached US$ 3.2 billion in
June 2019 (including a US$ 2.2 billion currency
swap with China). On the fiscal side, the overall
balance was in surplus in 2018 and in the first half
of 2019 (compared with a deficit of 3.8 per cent of
GDP in 2017). This was achieved by improved
economic performance and fiscal adjustment
policies. Public debt decreased to 73.3 per cent of
GDP in 2018 from 84.6 per cent in 2017, according
to the IMF. The IMF programme, initiated in early
2017, has been suspended since December 2018
partly due to delays in financial sector reforms
relating to the capitalisation of banks. Following
the asset quality review, five banks raised most of
their required capital but a forensic review was
launched in July 2019 to ensure that the
additional capital contributed by shareholders is
derived from legitimate sources. GDP growth is
projected at 6.8 per cent in 2019 and 5.4 per cent
in 2020 on the back of sustained domestic
demand and further FDI in the underground
expansion of the Oyu Tolgoi mine. Mineral
exports will support growth in the short term, but
their contribution will diminish in 2020, as China’s
growth is expected to moderate.
Tajikistan
In the first half of 2019, officially reported real
GDP growth was 7.5 per cent year on year,
following 7.3 per cent growth in 2018. Growth
was driven by gains in services and industry. This
led to an increase in exports (8 per cent year on
year in US dollar terms), particularly of metals and
precious stones. Remittances declined by 4 per
cent year on year in US dollar terms in the first
half of 2019, constraining private consumption.
Fixed investment contracted by 8.6 per cent in the
same period, mainly due to lower public
investment in the energy sector, which also
contributed to a slowdown in import growth. As
34
REGIONAL UPDATES
the growth of exports exceeded that of imports,
the current account deficit narrowed slightly in
the first half of 2019 to 3.1 per cent of GDP from
5.0 per cent of GDP in 2018. Credit growth began
to pick up in 2019, reaching 7 per cent year on
year in September 2019 (versus a contraction of 7
per cent a year ago). This trend, along with rising
food prices, has led to acceleration of inflation,
which neared the upper bound of the central
bank’s targeted inflation corridor of 5-9 per cent
in August. Nevertheless, the central bank reduced
its refinancing rate to 13.25 per cent in June 2019
from the 14.75 per cent set in February 2019, with
the expectation that inflationary pressures would
subside in the second half of 2019. In August
2019, exchange rate pressures prompted the
central bank to devalue the currency by 2.7 per
cent, bringing the official exchange rate closer to
the unofficial rate. The second unit of six units of
the Rogun hydropower plant was put into
operation in September 2019. However, there are
challenges with the full implementation of the
project, primarily related to financing. While
Tajikistan used proceeds from the sale of
Eurobonds to finance the initial stages of the
project, further funding options remain unclear
given the constrained fiscal space and weak
investment climate. The economy continues to
face structural challenges stemming from
solvency and liquidity issues in the banking sector,
as well as a significant debt overhang, which will
drag down future growth. GDP growth is
projected to be 7.0 per cent in 2019 and 6.3 per
cent in 2020.
Turkmenistan
Officially reported GDP expanded by 6.3 per cent
year on year in the first three quarters of 2019,
following the 6.2 per cent growth reported in
2018. This was enabled by an acceleration of
growth in industry (6.9 per cent versus 4.6 per
cent a year earlier). Exports are reported to have
risen by 7.5 per cent year on year in the first three
quarters of 2019, helped by a resumption of gas

exports to Russia. Imports continued to contract
(5 per cent year on year) in the same period due
to import substitution policies and foreign
currency restrictions. The parallel market
exchange rate stayed at around 17 to 19 manat
per US dollar in the first three quarters of 2019
(well above the official rate of 3.5 manat), with
pressures easing since the beginning of the year.
Inflation remains elevated due to high import
prices and the termination of social transfers for
electricity, gas and water in January 2019. GDP
growth is projected at 6.3 per cent in 2019,
slightly decelerating to 6.0 per cent in 2020, but
external imbalances are likely to continue in the
absence of exchange rate adjustment.
Turkmenistan is particularly vulnerable to any
slowdown in China and Russia, effectively its only
export markets.
Uzbekistan
The economy continued growing steadily in the
first three quarters of 2019 at 5.7 per cent year on
year on the back of strong performance in
industry and construction. Exports increased by
45 per cent year on year in US dollar terms in the
first eight months of 2019, and imports by 33 per
cent, reflecting trade liberalisation policies. Credit
expansion remains high at 60.4 per cent year on
year in August 2019, supporting the growth of
infrastructure investment and surging imports.
Average inflation decelerated to 14.1 per cent in
the first three quarters months of 2019 from 18.2
per cent during the same period in 2018. This
stems mostly from slower growth in food prices,
which has compensated for an increase in services
inflation. The central bank has kept the policy rate
unchanged at 16.0 per cent since September
2018. As of August 2019, the monetary authorities
removed the five per cent limit on daily exchange
rate fluctuations, allowing the rate to be
determined by the market. In addition, the sale of
foreign currency by commercial banks is now
allowed for purposes other than business or
tourist travel, including in cash form, which was
35
REGIONAL UPDATES
not previously possible. This is part of a wider set
of measures to further liberalise the foreign
exchange market. As a result, the exchange rate
depreciated by around 12 per cent relative to the
beginning of the year. GDP is expected to grow by
5.5 per cent in 2019 and 5.8 per cent in 2020 due
to sustained growth in investment, both domestic
and foreign, helped by rapid credit expansion.
Southern and eastern Mediterranean
In the southern and eastern Mediterranean
(SEMED) region, the average real GDP growth
forecast was revised downwards in 2019 to 4.4
per cent, around the same level seen in 2018,
owing to domestic and regional political and
security uncertainties in Lebanon and Tunisia, the
contraction in agriculture in Morocco and delays
in the implementation of reforms in Jordan.
Growth will be driven by the robust performance
in Egypt and by a strong tourism sector across the
region. Economic activity in SEMED is expected to
grow modestly in 2020 by 4.8 per cent, supported
by the recovery in the traditional drivers of
growth, higher exports, the implementation of
business environment reforms to attract foreign
direct investment, and greater political certainty –
both domestic and regional. However, in the
medium term, growth will continue to be lower
than the pre-2011 levels.
Egypt
Real GDP growth continued to increase, reaching
its highest level in 11 years (5.6 per cent) in the
fiscal year 2018-19, mainly driven by higher net
exports and investments. Tourism revenues
recorded historically high levels thanks to the
successful implementation of the tourism reform
programme (see Box 4). This sector, together with
the gas, trade and construction sectors were the
main contributors to the strong GDP growth.
Annual inflation has decreased to its lowest rate
in almost seven years – 4.8 per cent in September
2019 – from a record high level of 33.0 per cent in

July 2017, mainly due to currency appreciation
and a slowdown in food inflation. In the fiscal year
2019-20, GDP is expected to rise by 5.9 per cent,
driven by the continued strengthening of the
tourism sector and of exports, by large public
construction projects such as the building of the
New Administrative Capital, natural gas
production from the Zohr field and other new
discoveries, the re-engagement of private
investors – domestic and foreign – following the
recent trend of interest rate cuts, and the
continued implementation of business
environment reforms and prudent
macroeconomic policies. The main risks to the
outlook arise from a persistent wait-and-see
approach taken by foreign investors, the erosion
of competitiveness due to the recent appreciation
of the Egyptian pound, and the negative outlook
for the economy on account of the stagnation in
the European Union, Egypt’s main trading partner.
The risks are partially mitigated by the authorities’
demonstrated commitment to the
implementation of structural reforms.
Jordan
The pace of economic growth in Jordan was
restrained in the first half of 2019, with a sluggish
growth rate of 1.9 per cent year on year. Financial
services – including insurance, real estate and the
business services sector – were the major drivers
of growth, followed by the transport, storage and
communications, and manufacturing sectors.
Tourist arrivals continued to increase for the third
consecutive year, but remained at just 75 per cent
of the record levels achieved in 2010. Inflation
declined from its peak of 5.7 per cent in July 2018
to -0.3 per cent in September 2019. GDP growth is
expected to remain subdued in 2019 (2.1 per
cent) and 2020 (2.3 per cent), supported by
various factors. These include rising domestic and
foreign investment, the lower cost of imported
energy, increased finance provided to SMEs under
various schemes from the Central Bank of Jordan,
greater certainty and confidence stemming from
36
REGIONAL UPDATES
the commitments of the London conference in
February 2019, and an increase in exports
resulting from the re-opening of the border with
Iraq. Risks to the outlook include an erosion of
real competitiveness stemming from the
strengthening of the dinar (in light of the peg to
the US dollar), slow progress in implementing
reforms, and regional instability. On the upside,
significant fiscal and structural reform progress
would raise the growth forecast, improving
private sector-led growth.
Lebanon
In 2018, Lebanon’s GDP grew by a mere 0.2 per
cent, mainly driven by private consumption,
tourism and exports. The removal of the travel
ban to Lebanon in a number of Gulf countries led
to an improved performance in the tourism
sector, which subsequently benefited private
consumption. Furthermore, exports also rose,
driven by the opening of land routes with Syria.
Meanwhile, domestic and regional political
uncertainty continued to negatively affect
confidence and hold back growth. Non-resident
deposit flows, which finance Lebanon’s twin
deficits, reversed in 2019, with a net outflow of
2.4 per cent of GDP in the first eight months,
compared to a net inflow of 0.4 per cent of GDP in
the same period of 2018. Foreign currency
reserves also declined to their lowest level in
seven years, although they remain high at US$
30.6 billion in August 2019, covering more than
nine months of imports. Inflation moderated to
1.2 per cent in August 2019, down from a peak of
7.6 per cent in June 2018, due to an easing in
food-price inflation. The economy is expected to
remain in stagnation during 2019, before falling
into negative territory in 2020. However, the
outlook remains uncertain, with significant
downward risks, given the political instability and
recent social uprisings, which are undermining the
timely implementation of crucial fiscal, energy
and structural reforms.
 REGIONAL UPDATES

Morocco and parliamentary elections in September and

In Morocco, economic growth slowed in the first
half of 2019 to 2.6 per cent year on year, driven
by a 3 per cent contraction in the agricultural
sector due to poor rainfall. This was balanced by
strong growth of 3.5 per cent in non-agricultural
activities. Inflation remained low at 0.3 per cent in
September 2019, due to lower prices of food, oil
and lubricants, with average inflation in the first
nine months of the year standing at only 0.2 per
cent. GDP growth is expected to reach 2.7 per
cent in 2019, improving gradually to 3.3 per cent
in 2020. The increase in 2020 is expected to be
driven by stronger non-agricultural growth –
particularly in the mining, automotive and
aeronautical industries – a rebound in agriculture,
continued recovery of tourist arrivals, an
improvement in fiscal management and an
increase in foreign direct investment. Downside
risks include falling growth in Europe, lower
commodity prices, rising social discontent and the
vulnerability of agricultural production to weather
and price developments.
October 2019, respectively. In 2020, we expect a
recovery in foreign investors’ confidence and in
the reform momentum in Tunisia once the
elections are over. This will result in significant
improvements in both domestic and foreign
investment, pushing growth to 2.6 per cent. Risks
stem from the possibility that socio-economic
protests will disrupt production and slow progress
on reforms, given the new political structure and
falling growth in Europe. Upsides include the
improvements in tourism and investment and the
restoration of confidence following the successful
democratic transition, which should be reflected
in an increase in productivity and growth.

Tunisia

The economy grew at a slower pace in the first

half of 2019, achieving 1.2 per cent growth year
on year. The slowdown was driven mainly by the
fall in manufacturing industries and the decline in
extraction industries, despite the expansion in
commercial services – mainly in tourism,
communication and financial services – and
agriculture. Inflation has slowed, but remained
high in September 2019 at 6.7 per cent, compared
with a peak of 7.7 per cent in June 2018. Food and
tobacco prices remain the main drivers of
inflation, while the appreciation of the Tunisian
dinar and monetary tightening by the Central
Bank of Tunisia helped keep inflationary pressures
in check. For 2019 as a whole, growth is expected
to slow to 1.5 per cent because of a delay in the
implementation of structural reforms, notably due
to uncertainty in the run-up to the presidential

37

Box 4. Tourism reform programme in Egypt:
lessons for the SEMED region
In SEMED, the tourism sector is particularly
important as it is dominated by private
investment and, if it achieves its potential, could
provide employment and income to a large
percentage of the population.
After a sharp decline since the Arab Spring, the
tourism sector was among the main sources of
growth in SEMED during 2018 and is expected to
remain so in 2019 and 2020. Despite the high
growth of tourism receipts in SEMED in general,
and in Egypt and Tunisia in particular, the sector
still seems to be operating below its potential,
with an average of 6.8 per cent of GDP in 2018
compared with 7.9 per cent of GDP in 2010.
Recent performance of the tourism sector has
been impressive in Egypt, where receipts
increased by 27.6 per cent in the financial year
2018-19 to reach a historical record. This was
mainly due to the implementation of Egypt’s
Tourism Reform Programme (E-TRP), a
comprehensive programme by the Ministry of
Tourism. The country gained the fourth-highest
performance improvement in the World Economic
Forum’s Travel and Tourism Competitiveness
Index 2019, and received a 2019 Global Champion
Award from the World Travel and Tourism Council
for promoting resilience in the tourism sector.
The E-TRP is built around five pillars:
Institutional reforms to modernise the Ministry’s
organisational structure; improve the skillset of
the workforce; strengthen strategic partnerships
with international institutions to work towards
achieving the UN Sustainable Development Goals;
and improve the measurement of tourism’s
contribution to the national economy.
38
REGIONAL UPDATES
Legislative reforms to ensure inclusive
representation of the private tourism sector in
federations and chambers to help guarantee the
implementation of the legislative reform process.
Promotion and marketing to highlight Egypt’s
contemporary dimension using competitive
promotion and marketing tools consistent with
international trends and increase the sector’s
resilience by tapping new markets. It also aims to
modernise the Ministry’s presence at
international travel exhibitions.
Infrastructure and tourism development projects
to raise investment in 67 tourist areas and to
implement a strategy for sustainable tourism
development until 2030, aiming at diversifying
Egypt’s tourism, increasing the number of tourist
nights, and creating direct and indirect
employment with better community integration.
The E-TRP also updates hotel classification criteria
to international standards, in collaboration with
the World Tourism Organization, and improves
the international health and food-safety standards
of hotels. Lastly, it establishes a private equity
fund aimed at restructuring financially impaired
hotels and other tourist establishments.
A global tourism-trends programme focused on
branding Egypt as a destination with recognised
environmental and social sensitivities that is able
to meet future demand for green tourism
products. The programme promotes the
economic empowerment of women by increasing
their participation in the tourism sector, and
encourages innovative and digital solutions to
enhance the sector’s competitiveness.
Other SEMED economies also have strong tourism
potential, and lessons from the E-TRP can
therefore be replicated throughout the region,
helping to generate important gains in income
and employment.
References

EBRD (2016)
Regional Economic Prospects in the EBRD Regions, November 2016, London.

EBRD (2017)
Regional Economic Prospects in the EBRD Regions, November 2017, London.

EBRD (2017)
Transition Report 2017-18 – Sustaining Growth, London.

EBRD (2018)
Regional Economic Prospects in the EBRD Regions, November 2018, London.

EBRD (2019)
Regional Economic Prospects in the EBRD Regions, May 2019, London.

IMF (2019)
World Economic Outlook, October 2019, Washington DC.

J. Leal, R. Lehmann, B. Marc, T. Wollmershäuser and P. Wozniak (2019)

“The Weakness of the German Car Industry and its Sectoral and Global Impacts“, EconPol Policy Brief, Vol.3,
September.

A. Plekhanov and M. Stostad (2018)

“Modern growth in perspective: Relative performance since the global financial crisis”, EBRD Working Paper
No. 214.

39
 About this report

The Regional Economic Prospects are published twice a year. The report is prepared by the Office of the
Chief Economist and the Department of Economics, Policy and Governance and contains a summary of
regional economic developments and outlook, alongside the EBRD’s growth forecasts for the economies
where it invests.

For more comprehensive coverage of economic policies and structural changes, see the EBRD’s country
strategies and updates, as well as the Transition Report 2019-20, which are all available on the Bank’s
website at www.ebrd.com.

Acknowledgements

The report was edited by Zsoka Koczan (koczanz@ebrd.com) and Alexander Plekhanov
(plekhana@ebrd.com), under the general guidance of Beata Javorcik, Chief Economist.

Box 1 was prepared by Philipp Paetzold. Box 2 was prepared by Zsoka Koczan and Philipp Paetzold. Box 3
was prepared by Tea Gamtkitsulashvili.

Regional updates were edited by Peter Sanfey (sanfeyp@ebrd.com). The writing teams covering individual
countries and regions were:

 Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia: Peter Tabak
and Sanja Borkovic
 Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine: Dimitar Bogov, Ana Kresic and Galya
Beschastna
 Bulgaria, Croatia, Romania and Slovenia: Mateusz Szczurek and Jakov Milatovic
 Cyprus and Greece: Peter Sanfey and Julia Brouillard
 Egypt, Jordan, Lebanon, Morocco and Tunisia: Bassem Kamar and Rafik Selim
 Estonia, Hungary, Latvia, Lithuania, Poland and the Slovak Republic: Mateusz Szczurek and Marcin
Tomaszewski
 Kazakhstan, the Kyrgyz Republic, Mongolia, Tajikistan, Turkmenistan and Uzbekistan: Eric Livny
and Dana Skakova
 Russia and Turkey: Roger Kelly and Arda Sahinkayasi

Ralph de Haas, Artur Radziwill, Axel Reiserer, Mattia Romani and Anthony Williams provided valuable
comments and suggestions. Tea Gamtkitsulashvili and Philipp Paetzold provided research assistance.

40